No bank is ‘so powerful as to be untouchable.’ In July 2009, the immense State of California, the largest issuer of municipal bonds in the US, began paying its suppliers with fancy-looking interest-bearing IOUs because it had run out of real money.
They weren’t negotiable, and no one could use them to pay employees or suppliers. So Wells Fargo, headquartered in San Francisco, announced it would accept these IOUs from its business customers. It would pay them the principal in full and with some limitations the accrued interest. It took a risk: California’s default was a real possibility.
This is how Wells Fargo bailed out California during the Financial Crisis.
But now the fortunes have turned. The problems keep piling up for Wells Fargo, for its misdeeds committed in California. And the state is awash in moolah; its revenues are heavily influenced by capital gains taxes, and the stock market has been booming for over seven years (this is how the Fed’s asset bubbles bailed out California).
This post was published at Wolf Street on September 28, 2016.